On Nov. 11, 2022, Sam Bankman-Fried‘s collapsed crypto exchange FTX filed for Chapter 11 bankruptcy in the U.S. to restructure. At the same time, Sam Bankman-Fried resigned as CEO, bankruptcy expert John J. Ray became the new CEO. On the same day, Cyprus regulator CySEC suspended the license of FTX (EU) Ltd (formerly K-DNA Financial Services Ltd). According to the U.S. filing, this Cypriot entity is included in the U.S. Chapter 11 petition for creditor protection. An interesting legal situation.
U.S. Chapter 11 Petition Includes European Entities
In addition to the Cypriot entity, FTX Europe AG, registered in Switzerland, which was intended to be the holding company for all European FTX activities, as well as the other legal entities of the FTX Group in Germany, Switzerland or Gibraltar, are also included in the Chapter 11 filing in the U.S. How exactly this is supposed to work seems to be legally problematic.
Local Jurisdiction Counts
What is certain is that each legal entity falls under the insolvency regulations of the respective jurisdiction and cannot be determined via Chapter 11 proceedings in the U.S.. So, for example, if FTX (EU) Ltd becomes insolvent in Cyprus, then a corresponding insolvency proceeding must be filed in Cyprus. The same principle applies for the other European entities. For the creditors of FTX (EU) Ltd, the proceedings in the U.S. are therefore of little significance.
Investor Compensation Fund
As a CySEC-regulated investment firm, FTX (EU) Ltd clients of FTX Europe (https://ftx.com/eu) also fall under the protection of the Cyprus Investor Compensation Fund and are entitled to up to €20,000. This may not be much but it is better than nothing. Currently, neither CySEC nor FTX have made any announcements regarding the Investor Compensation Fund. This will probably take a while.
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